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We all get sloppy at times when it comes to financial matters. For example, you might not take the time to find the cheapest auto insurance, or maybe last week you forgot to put a little of that paycheck into your savings account.
But minor money mistakes like those don’t explain the fact that 40% of US adults don’t have enough money to cover a $400 emergency expense.
This isn’t about being poor. That 40% of the population has to include some middle class people, yet even those individuals would need to borrow money or sell something to cover an unexpected $400 expense!
So there are probably some bigger issues here, some bigger mistakes in how we approach personal financial matters. Let’s take a look at ten of them, and ask, are you guilty of…
1. Not Really Managing Your Money
You might think about money often enough, but do you regularly sit down to monitor and make plans for the money coming into and going out of your life?
If you just don’t get around to it, you’re not alone. A recent gallup poll found that two-thirds of Americans do not make a household budget.
That’s a problem. If you don’t know where your money is going, it will probably disappear into non-essentials instead of buying you what you really want.
For example, I had a friend who ordered pizza for delivery three times weekly, at about $20 per order. I’m pretty certain he didn’t know he was spending over $3,000 annually on pizza. I’m also pretty sure his plan to start a business (which he claimed was important to him) suffered as a result.
There is no “best” way to budget, so do what works for you, but do something!
You can start by categorizing your spending and writing down every dollar you spend for a month or more. You might be surprised by what you discover.
2. Not Understanding Fixed Versus Variable Expenses
Business people understand fixed and variable expenses, but the difference between them is often ignored when it comes to home finances. Big mistake.
Variable expenses, like weekly pizza deliveries, clothing purchases, and cable subscriptions, can be reduced or even eliminated quickly. Even if you currently spend freely on these things, you can slow down or stop when you need to.
Fixed expenses, like electric bills and mortgage payments, can’t be quickly or easily adjusted or eliminated. As a result, they largely determine how much income you need, and often determine how “close to the edge” you are financially.
That’s a crucial difference. You can stop eating out the day you lose your job, but the household bills keep coming, right?
So don’t simply budget for fixed expenses, but arrange to have them as low as you comfortably can. Buy a smaller home with smaller mortgage payments. Install energy-efficient light bulbs. Find cheaper rent.
Don’t make the mistake of “living beyond your means” or even living up to your means, at least not when it comes to fixed expenses.
I can tell you from experience that it’s much more relaxing to have low fixed expenses. You’ll have more money for vacations and eating out, but you can also cut those expenses instantly if you face financial troubles like a loss of income.
3. Overvaluing Appearances
Recent research finds that the neighbors of lottery winners are more likely than others to go bankrupt. Why? Apparently it has something to do with them trying to keep up with all the new stuff purchased by the lottery winners next door.
Sad? Maybe, but who hasn’t bought something that was meant, in part at least, to impress others? Buying a shiny new car is one of the most common examples.
Doing the research for their book, “The Millionaire Next Door,” Thomas Stanley and William Danko found that a significant percentage of millionaires bought used cars, because they cost less (yes, even after repairs). Habits like that might be part of why they’re millionaires.
In fact, the authors found that many millionaires do not appear to be rich, because they’re not all worried about appearances.
There’s a time to buy a new car, a boat, whatever — like when you can afford to pay cash. But if you want to actually get richer, don’t make the mistake of creating the illusion of wealth instead of working on the reality.
4. Not Preparing For Expensive Life Changes
The US Department of Agriculture reports that the cost of raising a child from birth to the age of 18 is now up to $233,610 for a middle class family. How many people do you think fully plan for that when they decide to have a baby?
Having a child is one of the most costly changes in your life, but there are others.
Moving, for example, can be more expensive than you think. There are the obvious costs of moving your stuff, but you also might have to pay startup costs for cable and utilities, buy new furniture, rent storage space, and so on.
Buying a new house is another great example, and the initial expenses may be just the start. You might have permanently higher monthly expenses if you upgraded from a small rented apartment to a larger home with a big mortgage loan.
Are you ready to buy a home? (That link will take you to six questions to help you decide.)
Are you fully prepared for whatever expensive changes you have coming?
5. Using Debt The Wrong Way
Buying things with credit cards isn’t a problem if you pay off the balances every month. But using credit cards to finance purchases is a big mistake.
Credit makes it seem like you can have more, but really you just pay more. 1st Source Bank points out that a $800 laptop will cost close to $1,500 with interest if you put it on a credit card and make only minimum payments.
Stay away from consumer debt and in the long run you’ll be able to afford more of everything you want. And if you really can afford a $450 car loan payment, you can afford to instead start saving $450 per month to pay cash for a car.
What’s the right way to use debt? To make or save money.
For example, borrowing to buy a home can save you money versus renting — if you do it right (in investment terms a home is not an asset, but can be a “save money investment”). Borrowing to start a business or to invest in real estate will (if done right) produce far more income than the interest paid.
6. Pretending Things Are More Unpredictable Than They Really Are
If your budgeting attempts are repeatedly thrown off by “unpredictable” expenses, you may be deluding yourself.
Some large expenses are truly unforeseeable, but most are only unpredictable in their timing. Nobody can predict the day the water heater will die and require an $800 replacement, but it’s 100% predictable that it will happen someday.
In other words, are you making the mistake of not preparing for predictable “surprises?”
Here are a few examples of “unpredictable” and expensive events for which you can prepare:
- Someday your car will require expensive repairs.
- Someday you’ll have a big medical bill.
- Someday you’ll have to travel to see a sick friend or family member.
- Someday, if you own a home, you’ll have to replace the roof, heater, water heater, refrigerator, washer, and dryer.
You can avoid some surprise expenses. For example, you can choose not to own a home if you’re not ready.
But if you do buy that home and the air conditioner guy says you have about 4 years left on the unit, and it will be $4,800 to replace, start putting aside $100 per month to be prepared. And you should probably put the money in a separate account.
In general you should always be saving money to cover “surprises.” One of the most predictable things in life is the fact that unpredictable (and expensive) things will happen.
7. Not Understanding The Real Cost Of Things
How expensive is a small RV if you pay a total of $14,000 with interest charges? RVTipster.com says that with depreciation, gas, insurance, repairs, maintenance, park fees, and such, it can cost over $400 per day of use — and that’s if you spend more than half of your nights at places with free RV parking!
When we want things we tend to downplay the real cost. Probably most people who own boats would spend far less overall if they got an “expensive” boat rental every time they wanted to get on the water (and they wouldn’t have the hassle of trailering the boat).
Don’t make the mistake of not understanding what things really cost. Do the math.
8. Being Too Generous
If you’re from a family full of people who are always in financial need/trouble, and you’re the generous sort, you may find that you can never get ahead financially. If your generosity extends to your circle of financially-challenged friends the situation may be even worse.
Hey, it’s nice that the poor are more charitable than the wealthy, but sometimes being too generous also keeps you poor.
What about loans? Market Watch reports that family loans arranged through Virgin Money are twice as likely to be in default as bank loans — and those are loans that are documented and arranged using a third-party service. Informal loans are much more likely to be left unpaid.
Be generous, but first get your own affairs in order. And consider a personal undocumented loan as a gift (make it one you can afford), because that’s probably what it will turn out to be.
9. Thinking You Can Get Rich Quick
In a previous post I explained why I go to free seminars; for the entertainment and free meals. What I never do is make the mistake of buying into the “next step,” the expensive seminar that is being promoted during the freebie.
What they really promote, of course, is the idea that you can get rich quick — as long as you pay thousands of dollars to learn the “secrets.”
There are many secrets to making money, but most of them can be found in inexpensive books, and none of them is likely to get you to your first million by next year.
Indulging in the fantasy of a fast-track to wealth is a mistake because it wastes your time and money, and so gets in the way of doing what you need to do for long-term financial success.
10. Not Planning For Retirement
A GOBankingRates survey found that 42% of Americans will retire broke (with $10,000 or less saved). Struggling when you’re young is not a big deal — it’s an adventure. Being broke when you’re older just plain sucks.
Don’t make the mistake of failing to plan for retirement.
Which of These Mistakes Are You Guilty Of?
Okay, you’re not making every mistake on the list above, but you’re probably guilty of at least one or two of them, right? So what should you do?
Calculate what those mistakes are costing you, and speculate on where you might be if you made none of them. That might give you the motivation to make the necessary corrections.
If you’ve made any of these money mistakes, please share your stories below … and keep on frugaling!